G1 - General Financial Markets
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Leaning Within a Flexible Inflation-Targeting Framework: Review of Costs and Benefits
This note examines the merits of monetary policy adjustments in response to financial stability concerns, taking into account changes in the state of knowledge since the renewal of the inflation-targeting agreement in 2011. A key financial system vulnerability in Canada is elevated household indebtedness: as more and more households are nearing their debt-capacity limits, the likelihood and severity of a large negative correction in housing markets are also increasing. -
Are Counterparty Arrangements in Reinsurance a Threat to Financial Stability?
Interconnectedness among insurers and reinsurers at a global level is not well understood and may pose a significant risk to the sector, with implications for the macroeconomy. Models of the complex interactions among reinsurers and with other participants in the financial system and the real economy are at a very early stage of development. -
Time-Varying Crash Risk: The Role of Stock Market Liquidity
We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on return variance once we include market illiquidity as an economic variable in the model. -
Global Macro Risks in Currency Excess Returns
We study a cross section of carry-trade-generated currency excess returns in terms of their exposure to global fundamental macroeconomic risk. -
Implementing Market-Based Indicators to Monitor Vulnerabilities of Financial Institutions
This note introduces several market-based indicators and examines how they can further inform the Bank of Canada’s vulnerability assessment of Canadian financial institutions. Market-based indicators of leverage suggest that the solvency risk for major Canadian banks has increased since the beginning of the oil-price correction in the second half of 2014. -
June 9, 2016
Securities Financing and Bond Market Liquidity
This report investigates how the markets for repurchase agreements and securities-lending agreements support the liquidity of Canadian bond markets. It also discusses how recent regulatory changes, as well as low interest rates and settlement failures, are potentially affecting securities-financing markets and, as a result, bond market liquidity. -
June 9, 2016
Large Canadian Public Pension Funds: A Financial System Perspective
The authors review the eight largest public pension funds in Canada. These funds are an important source of retirement income for Canadians. They are also significant investors, with net assets under management of over $1 trillion. The authors outline the investment strategies of the funds and how they interact with financial institutions and participate in financial markets. They also discuss the ways in which the funds’ risk-management frameworks could contribute to financial system stability and how they minimize potential vulnerabilities. -
On the Nexus of Monetary Policy and Financial Stability: Effectiveness of Macroprudential Tools in Building Resilience and Mitigating Financial Imbalances
This paper reviews the Canadian and international evidence of the effectiveness of macroprudential policy measures in building resilience and mitigating financial imbalances. The analysis concludes that these measures have broadly achieved their goal of increasing the overall resilience of the financial system to the buildup of imbalances and increasing the financial system’s ability to withstand adverse shocks. -
Early Warning of Financial Stress Events: A Credit-Regime-Switching Approach
We propose an early warning model for predicting the likelihood of a financial stress event for a given future time, and examine whether credit plays an important role in the model as a non-linear propagator of shocks.